Jewellery Purchase scheme or disguised Fixed Deposits

A very interesting item caught my attention in today's Times of India, Mumbai edition. There is an advertisement fro Tanishq - a Tata Group company. The ad is not about launch of a new scheme, but that for the closure of one. This happened due to the introduction of the Companies Act, 2013.

Under the new Companies Act, there is an amendment in the Companies (Deposit Acceptance) Rules. Under these rules, the definition of deposits is widened to cover even advance payment systems.

Tanishq ran very successful jewellery purchase schemes under the names of "Golden Harvest" and "Swarna Nidhi". Both were highlighted as schemes facilitating the purchase from small savers. These schemes allowed people to deposit small sums of money each month for a certain period and then at the end of a specified period, buy jewellery from Tanishq out of the money so accumulated. In a sense, this was a very nice facility for people who can save small amounts. It was also good for the company since it allowed them low-cost float for the period of deposit. It was definitely far superior for the company than offering credit (EMI schemes) to the jewellery buyers.

What was missing, then? - The customer protection was missing. Many investors (I have replaced the word buyer with investors) entered such schemes without understanding what they were doing.

Before we move ahead, let me add a clarification here. The discussion from now on is not about the credentials of Tanishq. My respect for the group has only gone up with this advertisement. No other entity would take such a step as to put an advertisement in a leading daily related to a matter unnoticed by most and can have major impact on the company's financials, cashflow and business. 

Let us understand two separate purchase mechanisms:

1. When a buyer pays advance to buy the item later: making payment now with a promise of delivery in future
2. When a buyer buys on credit: getting delivery of the goods now, but paying later

In the second case, the seller would ask for various documents to verify the financial ability of the buyer to fulfil his (or her) side of the commitment. Only then would the goods would be delivered.

However, in the first case, the buyer starts making payment on "trust" without even having the choice to see the financial strength of the counter-party. Trusting someone is not bad, but it is important that it should be a choice and not the only option. 

Now by bringing all such mechanisms where the term of the contract is more than a year - or the time between the first payment and the delivery of goods is more than 365 days, this would be construed as a deposit.

There are some superb measures with respect to the safety of the depositors - some old and some added now:

• Deposit trustee - appointment of an independent trustee is a must now
• Deposit redemption reserve
• Credit rating is required
• Capital adequacy requirement - a minimum net worth or turnover is a must for the company
• Company's borrowing limit may be linked to it's net worth
• The company must disclose if it has defaulted on it's obligations in the past 
• Purchase of deposit insurance cover by the company

This is a fantastic move by the Government and would go a long way in protection of customers. Next time you deal with any entity asking for advance money, keep the provisions of Companies (Deposit Acceptance) Rules in mind.